Category: Asian Politics

There is a solution to the North Korean problem, but it does require China, the US and North and South Korea to compromise. There may be a real basis for a settlement, but one no-one wants to contemplate it, least of all the Americans.

The dilemma Is this:

the Chinese have consistently said they have two major concerns on the Korean peninsula:

that if there were to be a united Korea, they would have US troops on their border, something they will never countenance; and

that if there was a collapse of the North Korean regime, there would be a flood of refugees into Northern China, which they would feel obliged to not only manage, but also finance.

The Americans increasingly seem to feel holding-on to Korea is part of their DNA in spite of the fact it seems to be leading to a nuclear exchange in North Asia which will have catastrophic consequences for the whole world. This is made doubly dangerous as we seem to have psychologically unstable leaders in the White House and the Kremlin who, for separate reasons, appear to believe this situation is to their benefit.

Any solution though involves compromise on all sides, something that has been sadly lacking until now. So what might the compnents of a settlement look like?

The US offers withdrawal of all its troops from South Korea in exchange for joint security guarantees from China and the US.

In return, China cuts off ALL trade to North Korea, and forces Kim Jong-un to resign and flee to a third country, with the US and China guaranteeing Kim and the major players of his regime immunity from prosecution, a safe passage and financial support indefinitely.

Korea holds free and fair elections under the supervision of the UN for the whole of the Korean peninsula.

The UN puts into the Korean peninsula a peace keeping force of 250,000 troops to guarantee security while this process is taking place, but excludes troops from North and South Korean, US, China, and Japan. This could be paid for by Korea, Japan, the US, China, and ASEAN, plus a small special levy on all UN nations as avoiding nuclear war benefits all nations.

Both south and north Korean troops would be disarmed in the lead up to the elections. Thereafter, the united Korean armed forces would be pledged under their new constitution to be a pacifist force not unlike the current Japanese armed forces.

There are clearly a number of implications to this, most of which are canvassed below…

There are workable options for Korea to avoid war, but it requires compromise on all sides including the US

By

Michael J. Liley

In September 2017, the world appears closer to a nuclear exchange than at any time since the end of the Second World War. The apex of this tension is the rogue state North Korea which also happens to have developed nuclear weapons and is rapidly moving towards acquiring the means to deliver them across oceans.

This situation has turned out to be an early test for the new Trump Administration in the US. Unfortunately for world peace, Trump, and North Korean Leader, Kim Jong-un seem to have similar narcissistic personalities, with both behaving unpredictably and prone to taking things personally. This, of course, makes the situation much more unpredictable than if it had been between more “normal” personalities. Although this is a very dangerous situation, I would like to suggest that with creative thinking and goodwill on all sides, there is a potential solution.

China and the US will be the key to any solution, and both have a great deal to lose should we all end up in war. Donald Trump is not afraid to tell anyone who will listen that he is a master deal maker. Here, with North Korea, there may be the biggest deal he could ever make, but his understanding of world affairs is seemingly so naïve, and he doesn’t seem to listen to his senior diplomats, especially since he has emasculated the State Department for ideological reasons. He more than ever needs them but does not seem to have much faith in them, while at the same time growing the military budget by tens of billions annually.

Meanwhile, China appears to be taking a back seat, feigning cooperation with the US, but in reality, doing very little to restrain North Korea. The cutting off of the North’s trade in coal (the North’s biggest export earner) with China early in April 2017 together with recent additional sanctions, may be a sign of things to come, but there needs to all embracing actions which will starve the North Koreans out. China is still a long way from that.

China and the US will be the key to any solution, and both have a great deal to lose should we all end up in war. Donald Trump is not afraid to tell anyone who will listen that he is a master deal maker. Here, with North Korea, there may be the biggest deal he could ever make in his life, but his understanding of world affairs is so naïve, his decision making is very erratic and unpredictable which only serves to destabilize the situation. The fact that he has emasculated the State department does not help at a time when he needs their expert advice more than ever.

There is no obvious way that North Korea could be stopped by military force. At the moment, North Korea is showing off its military hardware, including nuclear weapons. The North Korean leader, Kim Jong-un, is exhibiting these capabilities to deter the West (and China) from taking any meaningful action to curb his recklessness. Yet the North Koreans are more and more prepared to be provocative, which ranges from military parades and test-firing various rockets, and threatening to fire off nuclear warheads to the west coast of the US, and recently even to Australia.

Most military experts keep reassuring us that Pyongyang does not currently have the capabilities to carry out such threats, although this is changing rapidly and Kim is increasingly sourcing his rockets from rogue suppliers in the Ukraine. However, it is true that these same military experts gave the same reassurances before the initial Korean nuclear tests, and then the first firings of their intercontinental ballistic missiles. The US is using every means it can to sabotage the development of these capabilities particularly by hacking their systems, seemingly with some success. But if nothing is done to destroy this developing capability, Pyongyang will eventually acquire the means to destroy the US (and Australia).

For the first time since the invention of the Atomic bomb, a nuclear exchange seems like a real possibility. Clearly, this is something that neither China nor the US, together with their Allies, can tolerate. Meaningful action is needed and needed urgently.

This situation is very dangerous, both in the short and long term. The World is watching, and if the North Koreans are seen to be getting away with thumbing their noses with impunity at the great powers, this is a very serious and dangerous position for all of us to be in. The implication from this is that any little tin pot regime which acquires nuclear weapons in the future will think they suddenly will have equal status to the established nuclear powers, and then who knows what might happen? Further, if nothing is done by the US and China, it will give every crazed dictator a reason to go after the nuclear option because they will then think they will be propped up (unintentionally) by the great powers. It is urgent that China and the US act in unison on this for everyone’s sake.

China and US face several options. First, bomb North Korean nuclear, artillery and rocket sites. There is no guarantee this would be successful and it would almost certainly provoke retaliation against South Korea and possibly Japan. Although the Allies have estimated they could destroy the North Korean arsenal within a couple of hours, they also believe over this period it would allow North Korea to launch artillery attacks on Seoul (the capital of South Korea and just over 50 km from the North’s border and so well within artillery range) with a population of some 10 million people. It is estimated that over this two-hour period, there would be upwards of 200,000 fatalities in Seoul alone, let alone the rest of the country.

Secondly, China and US could invade North Korea. This would make the invasion of Iraq look like a Sunday afternoon picnic, with heavy casualties on both sides, with no guarantee it would avoid a nuclear exchange.

Thirdly, special forces could assassinate Kim Jong-un much in the same way as they assassinated Osama Bin Laden in anticipation that this would lead to a people’s uprising. Most experts though appear to believe that this would more likely lead to one of his hard line Generals taking over, which may lead to an even more unstable situation.

Fourthly, China and the US could sponsor a UN resolution banning trade with North Korea for all member states and impose sanctions on all third parties (like Chinese Banks) who violate the ban. Although this would eventually lead to the regime’s collapse, it would take some time, and there is no guarantee in the meantime that the North Korean government would not set off military strikes in retaliation.

In reality, there is probably going to need to be a combination of all of these options, but the one thing they cannot do is sit on their hands and hope the problem will go away. it is urgent that the US use diplomacy to get China on board, and jointly formulate a plan. What sort of deal could result?

In 2017, China is involved with 95 percent of North Korean international trade. China could force the collapse of the North Korean regime by closing their borders and jointly penalise, with the US, any other country (or organisation) which supports them in any way. This would lead to the regime’s collapse within days. They then would need to negotiate a settlement probably including a safe passage for all the major leaders of the regime to a third country with guarantees about their immunity from prosecution. This assumes though that a desperate regime would not take military action in the meantime, but there are no risk-free options in this situation.

The settlement could lead to a militarily neutral Korean peninsula which includes the withdrawal of all foreign troops (US and Chinese), the withdrawal of the THAAD missiles from South Korea, and neither China nor the US would any longer provide nuclear guarantees. Within 12 – 24 months, there would be free and fair elections for the whole of the Korean Peninsula, overseen by perhaps a neutral entity like the European Union. In return, the united Korea would have to undertake to adopt a pacifist constitution, not unlike the Japanese one adopted after World War 2, with security guarantees from both the US and China. The new Korea would be allowed armed forces but only to be used in self-defence, just as the Japanese are able to do today.

In the interim, a UN administration would be set up to run the country and to supervise elections. An international military and police force would be assembled to keep order but would specifically exclude US, Chinese, and Japanese personnel, and a UN appointed Administrator would run North Korea in the meantime. Once elections were held, and a constitution approved by the people, it would be up to the new Korean Government to define the way forward.

In this, the new united Korea could learn much from the German unification process in 1989-1990. For starters, they should avoid much of the huge reconstruction costs the Germans suffered by basically allowing the market, in large part, to finance it. In the German case, they allowed parity between the Deutsch mark and the East mark virtually straight away when at the time of unification the market value of the East mark was a between a half and a third the value of the West German currency. This meant that there was very little incentive for western companies to invest in East Germany, so much of the huge cost of reconstruction was born by the West German taxpayers which constrained growth of the unified German state for more than a decade. This cost far more than it need have, and left no permanent incentive for the market to move to the east to help reconstruction.

The best way for a united Korea to handle this would be by having a federation with two currencies. This would give a huge incentive for South Korean, Japanese, European, US and Chinese companies to move operations to the north as it would be much lower cost to operate than almost any other country in Asia, North America or Europe. This would rapidly allow the north to grow and develop until the exchange rates eventually come together, maybe over a 40-50 year period. This would be highly advantageous for South Korea also as it would allow them to have a low-cost economy from which they could run their considerable manufacturing capabilities with a population which speaks the same language, in the same cultural milieu, and which would increasingly operate under the same laws. The subsequent additional taxes generated by an increasingly prosperous North would largely support the building of the significant infrastructure which would need to be constructed to get the population out of poverty and into productive work.

This would be highly advantageous for South Korea also as it would allow them to have a low-cost economy on their doorstep. From here they could run their considerable manufacturing capabilities with a population which speaks the same language, in the same cultural milieu, and which would increasingly operate under the same laws. The subsequent additional taxes generated by an increasingly prosperous North would largely support the building of the significant infrastructure to get the population out of poverty and into productive work. It would also mean substantially reduced spending on defence on both sides of the border, the savings of which could be channeled into further economic development.

It is said there are two major things that worry China about Korean unification. First, a failed state on its border with accompanying refugee problems, starvation and death. China thinks it would be obliged to pick up the tab for fixing this which would be a major cost to its treasury for very little benefit. Secondly, it does not want a successful democratic state on its borders occupied by US troops and hostile to its interests.

This solution addresses both of these issues by disarming Korea, having all foreign troops withdrawn, getting the new state to renounce an aggressive armed state and nuclear guarantees, and provides an orderly transition. Just like Germany. It would create a new prosperous state with prospects of high growth for many years to come, and for which China will no doubt be its major trading partner. It would also provide stability – the thing China values above all else. In other words a much better solution for both China and the rest of the world.

A unified Korean state would be brilliantly positioned to become the new Asian economic super-tiger and a potentially politically stable one at that.

In 2018, an alliance of Arab Academics, leading business people, politicians, and lay people formed a group called “Towards a true Arab Secular Consensus” TTASC. The basis of this organisation was a five year Study by a group of sociologists from Cairo University which looked at Arab societies pre and post the so-called Arab Spring. What they sought to find out was why the so called secularists, and their political parties, had failed so badly in these revolutions. Their conclusions had a profound effect on these people.

Their findings stated that it was not true that secularism had no support in Arab societies – quite the opposite was true. By far the most popular government form was a secular government where constitutions formally separated Church and State. This was of course what all the dictators or Tunisia, Libya, and Egypt claimed to be the case with their dictatorships. But it was not the case at all. In those societies, the governments designated a particular church which favoured their world view, supported them with cash and resources, and squeezed the other ones out. There was never a secular state as such. This arrangement so annoyed the other churches, that when the Arab Spring came they saw it as their chance for revenge, and managed to highjack the democratic agenda through superior organisation and funding from sympathetic petro states before the true secular forces could get focussed and organised. The new TTASC organisation sought to educate, create debate, and form political parties to argue for what they regarded as true secularism. Secretly, Western intelligence services began to fund the TTASC.

Hilary Clinton could see this too, as she sought to find a way through the mess which was Syria. In her inauguration speech of 2017, Clinton went said:

“Unfortunately, we live in a dangerous world. The civil war in Syria has continued on its bloody path now for almost 6 years. The factions are no closer to resolution than they were four years ago, in spite of our military trying to blast then apart with our extraordinarily accurate and skilled strategic bombing from our drones. This is the most dangerous situation in the world right now, and I pledge to work with our Middle Eastern Allies and friends in finding some sort of peace in this troubled country. We must find a way of showing all Syrians that a society can be formed which treats all religions equally, and that Governments are seen to be even-handed in the eyes of all of its citizens”.

It was true that the Syrian Civil War had raged on since 2011, when the so-called Arab Spring showed so much promise of an Arab democratic awakening. Unlike Libya and Tunisia, which settled down fairly quickly to stable but not exactly democratic secular regimes, Syria in 2017 remained a quagmire and Clinton was entitled to some caution. What followed though was some of the most effective US diplomacy in living memory.

Obama’s Secretary of State, John Kerry, made it his mantle when he came to office in the second Barrack Obama term, that he would do everything in his power to obtain an Arab-Israeli settlement. It took him nearly four years, but eventually he had an agreement in June 2016. In exchange of land for peace i.e. in other words, substitute the land taken by the ultra orthodox settler movement on Arab land for land in Israel which presented a corridor between the West-Bank and the Gaza Strip (something the Palestinian had always longed for, and which in many ways made the new Palestinian state viable), and in declaring Jerusalem an international city under collective control of Israel, Palestine and the UN. Both the Palestinian side and the Israeli side now had something they could live with. They had a mutual interest in making it work, but no-one could have predicted the Syrian mess.

By 2016, the Syrian war had been going on for 5 years, locked in a stalemate which would have made World War 1 Generals proud. With so much hope after the historic Arab-Israeli settlement, the region seemed destined to slide back into chaos. They did not bargain on either Clinton’s determination, or Kerry’s skill. Clearly the only way to save this situation was to get the Arabs to resolve the situation themselves.

The incoming Clinton administration knew that there were grave concerns in the Middle East about Obama’s Climate Treaty with Xi JinPing. After all, in the last three years since action on climate change had gathered force, they had seen the oil price drop from $110 per barrel in 2010 to $62 in 2016. This could only be as a result of a migration away from oil to alternative energy sources as the price of carbon started to climb. For this, the Gulf States were in a bind. Much of their wealth when the oil money was rolling-in in the last 50 years had been wasted in extravagant lifestyles of the ruling elites, and flagrant wastage of energy by the regimes which paid zero notice of modern energy conservation technologies. Further, they had done little to use modern financial devices such as sovereign wealth funds to accumulate cash and invest it for the long term in the interest of their populations as the Norwegian Government had done.

Clinton wanted to do a deal. She suggested the Middle Eastern Arab States needed as one to force a regional settlement on Syria, whereby the various ethnic and religious factions were given a district which they could regard as their sovereign territory. This might end up a bit like the former Yugoslavia, but it might be the price that needed to be paid. Further, Clinton advised that she expected the Gulf States to commit to forming a regional military force of 100,000 men to go into Syria after this regional agreement was signed to ensure its transition.

In parallel, the CIA and MI6 funded the emergence of credible educated secularists, and used modern communication techniques to position them as the alternatives to the literally warring factions of Syria. In doing this, the US gave these statesmen a gift in that if they could come to a settlement, all imports of oil in the future into the US would be ordered from the Gulf States (this was hardly a big concession because she knew that oil use in the US was dramatically dropping in favour of alternative energies and the local production of fracking inspired natural gas). It nevertheless gave the Sheiks of the Gulf States something to sell to the populations, and greatly increased the power and prestige of the secularists.

In 2018, after nearly 10 years of war, Clinton had an agreement, and the Arab Military force moved into Syria to keep the peace. It would be another 6 years until their withdrawal, after much more bloody fighting and killing, at the end of which half a dozen mini states were formed in Syria, with secularists heading four of their governments. Many equated it to the portioning of India and Pakistan in the late 1940’s – an apt description.

Clinton had several other urgent foreign affairs issues to address if she was going to keep her promise of progress in the world, not least the Korean Peninsula. North Korea by 2017, had become even more unstable than before. In December, 2016, there appeared to have been a military coup in North Korea. The People’s Radio broadcast on 16th March 2017 that due to Kim Jong-Un’s inability to stand up to the West and the criminal regime in South Korea, VMar Ri Yong Ho, previously head of the Korean People’s Army had taken over as President and Prime Minister. In the broadcast he said the people could no longer tolerate the appeasement of the West and China and the Korean state would do all in its power to stand up to imperialist and appeasers in the interests of the heroic Korean People. China’s reaction was fierce and decisive, in that if they did not get undertakings of peace from the North Koreans in the next three days, they would take decisive action to shore up their position.

Within 24 hours, the North Koreans started shelling the Chinese Province of Shenyang “in retaliation for the Chinese aggression”. China responded by cutting off all food and water supplies to Korea. Within 12 hours, North Korea landed a “dirty” nuclear bomb on Shenyang killing 3500 people in the process. Within two days, an invasion force had amassed on the border and went over on the night of 24th December.

The West was torn. On the one hand it regarded Pyongyang as dangerously unstable, but it was greatly worried that the invasion of another country by China unchallenged by the West might set a dangerous precedent. Clinton’s response was to immediately fly to Beijing for emergency talks with her new friend Xi Jinping. The results were momentous.

In the interests of stability, and the economic and political progress of the Asia region, Xi proposed a settlement. China would force the collapse of the North Korean regime in return for the withdrawal of all US troops on the Peninsula and the US nuclear guarantee for South Korea. Within 12 months, there would be free and fair elections for the whole of the Korean Peninsula overseen by the European Union who has no vested interest in this fight. After that, it would be up to the new Korean Government to define the way forward. In the meantime, a UN military force from all over the world, but specifically excluding US, Chinese, Japanese and Korean troops will be assembled to keep order on both sides of the border, and a UN appointed Administrator will run North Korea in the meantime.

The new united Korea leant much from the German unification process. For starters, they avoided the huge reconstruction costs that the western part of Germany poured into the East by basically allowing the market, in large part, to finance it. This was brought about by having a federation with two currencies, and watch south Korean, Japanese, European, US and Chinese investment money pour into the North until in 50 years time when the north and south economies would become similarly prosperous, the currency values would converge at which time they would have a united currency. In the meantime the plan was that North Korea would become a huge low cost factory for the south and the rest of Asia, supported by South Korean expertise, money and their huge conglomerates. The subsequent new taxes would largely support the significant infrastructure which would need to be build to get the population out of poverty and into productive work.

And so it proved to be. Today, in 2040, North Koreans have about twice the average income as the Chinese in 2015, most of the population are now out of poverty, there is no starvation and the Koreans are on track to converge their currencies in 2050. With a population of about 70 million and growing at about 1% per annum, they are on track to have an economy about the same size as Japan by 2075. Japan’s population contracted from 125m to 85 million from 2010 to 2040, and is expected to be less than the unified Korea by 2075.

In 2017, Clinton and Kerry jumped at this new Korean opportunity. This was an historic chance to rid the world of yet another rogue nuclear state. Just as in 1989, when the Berlin Wall came down, the British and French were less than enthusiastic about a united Germany, the second and third most powerful states in Asia, Japan and India, had similar reservations about Korea. The new right wing government in Japan was particularly upset about being excluded in an arena they regarded as their “back yard”, but for the sake of peace, they acquiesced. So eventually did the Indians in return for US support in their continuing conflicts with Pakistan.

Clinton had achieved one more of her dominos for the sake of world peace. Very soon another would emerge which may have a greater long term impact than any of the others.

In 2014, ex-cricketer Imran Khan became the new President of Pakistan. Cambridge educated Khan, playboy extraordinaire from his life in London, had returned to Pakistan to enter politics. His ticket was pro-Islam, but not terrorism, but he very much disagreed with Barrack Obama’s policy of drone strikes in border areas of north western Pakistan near the border of Afghanistan. Khan argued that there are the “good” Taliban and the “bad” Taliban. He promised in his election manifesto that if he could get the Americans to cease their drone attacks that he could get the “good” to control the “bad”. In other words, cease the terrorist attacks on troops in Afghanistan stemming from Pakistan, and set up an Islamist government without the extremes i.e. no education for girls, be-heading or cutting off of hands, or female circumcision. They would still have Sharia law and strict adherence to Islamic beliefs.

He also undertook to send in a dozen divisions of Pakistani troops into those provinces to rid them of extremist under the guidance of the “good”. He knew this may be just a ruse to settle old scores but thought it worth the risk. In return for this clean up, the US would finance a security wall (not unlike that seen in East Germany) along the Afghanistan border to keep the factions apart. This Clinton agreed to.

Beyond that, Khan wanted to transition a fundamental change in the way the sub-continent functioned. He was very much aware of the historic enmity between Pakistan and India, which had poisoned progress since partition in 1947. For instance in 2012, the total trade between the two countries was $2.4 billion. This compared to trade between Pakistan (population 182m) and China (population 1300m) for the same period of $12billion when Pakistan and India (population 1200m) live next door to one another. Or to look at it another way, neighbours Australia (population 23m) and New Zealand (population 5m) had overall two-way trade in 2012 of $21b. Pakistan was nowhere near maximizing their economic and trade ties with India or vice versa.

Khan was very much aware of the lack of economic activity on the sub-continent, and saw fixing that as a means of lifting a lot of his population out of the grinding poverty that so many of them lived in. As part of the resolution of the border disputes and bringing the Taliban under control, he advised Clinton that he would propose an economic union between the major countries of the sub-continent (India, Pakistan, Bangladesh, and Sri Lanka), if she would sponsor that trading block into the Asia-Pacific Partnership Agreement.

This finally came about in mid 2018, and in 2038 India and Pakistan did a total of $158billion in total trade.

from my book “Australia and the World in 2040“. Complete copies available in February 2018

In the early part of the 21st century, China was the fastest growing economy in the world and overtook the US in GDP terms in 2015. It also had the greatest foreign surplus in the world, and was the largest lender to the US, the biggest foreign debtor nation in the world.

When Xi Jinping came to power in 2011, the per annum growth of China’s economy was beginning to slow from the heady 10-15% rates for most of the 25 years to 2012 to a more modest 6-8%. Although still very high by world standards, slow growth in China meant a lessening of the Communist Party’s legitimacy (at least that was the fear in the minds of its leaders). Much of the high growth in that 25 year period had come from the rapid industrialisation brought about by Deng Zou Ping’s reforms at the 1979 plenum which turned the country into a market economy, at least for manufacturing products.

This resulted in about 400m people migrating from the country sides into cities where they manned the new factories, often in very primitive conditions. It nevertheless saw most of those 400m people go from rural poverty to earning a living wage – an unheard of event anywhere in the world up until that time. By 2010, though, much of China’s advantages in basic manufacturing were eroding with higher wages, higher costs and a higher exchange rate. Many factories were moving to lower cost countries such as Vietnam, the Middle East and Africa.

China now faced new reform challenges, which would see itself move up the “food chain” from low skill manufacturing, to high tech, innovative design and manufacturing. It also needed to rapidly develop its services sector such as education, finance, medical, bio-technology.

They also needed to rapidly reform agriculture where there was no private ownership of land (it was largely controlled by regional party chiefs), so there had been nothing like to development of rural land under private ownership equivalent to what had happened with city dwellings. As a consequence, Chinese agriculture was low tech, low productivity, and the peasants had little incentive to develop their land.

They also singularly lacked what most western countries took for granted, and which China’s rapidly growing and well educated middle class were demanding: rule of law, modern government services such as a social security safety net, modern hospitals, pensions, consumer laws, environmental laws. Most of all though, what Chinese people most wanted was a society free of corruption, especially by part bosses.

At the historic plenum in 2013, Xi Jinping discussed and flagged a number of reforms which in many ways exceeded Deng Zou Ping initiative in the early 1980s. For the first time, the Plenum’s official document committed for markets to play a “decisive” role in the allocation of resources in the economy. In the coming years this lead to the role of state own enterprises being considerably diminished, with many of them being privatised or closed (if they were too inefficient).

The SOEs, which in 2013 represented over 50% of economic output, were also expected to stand on their own merits in terms of funding, and banks were liberalised and skilled in terms of their commercial lending activities in order for this to be brought about. These reforms resulted in a number of enterprises going to the wall (bankruptcies in SOE’s were allowed for the first time in 2016), but it also resulted in a number of them becoming internationally competitive, and a number of them grew into major global corporations. In 2014, there were 2 Chinese companies in the top 1000 companies (outside the US) by capitalisation. By 2030, there were 55, all growing out of reformed SOEs of 2014, and all public companies floated on the Hong Kong and Shanghai Stock exchanges

To support the 2013 reforms, financial institutions were up-skilled in money market operations as the Party announced that as of the end of 2014 there would be a partial float of the Yuan and a full float by 2016 when it would become the single Chinese currency, both domestic and international, and would be fully convertible. When this came about in January 2016, the currency rose by 25% against the US dollar. Interest rates became market determined by the beginning of 2015, the Chinese Central Bank was made independent of day to day government directive, but was required to work within parameters determined by the government to achieve certain economic outcomes such as exchange rate bands, inflation and unemployment had to be kept within certain bands. Between 2015 and 2020, the government also spent $250m in computerizing their services, particularly to online services, and in boosting the activities and sophistication of the Chinese Bureau of Statistics.

All these changes were primarily designed to make the economy more transparent, less corrupt, and oriented to moving away from growth coming from investment in export industries to growth coming from productivity improvements and rapidly expanding consumer demand at home. The reforms included:

key economic reforms such as liberalising the setting of interest rates (ie to the market), incentivising innovation, loosening the grip of competition-stifling state-owned enterprises (SOEs) on vital areas of the economy;

allowing private ownership of rural land, and removing the ban on rural residents buying land in cities, which would allow peasants to cash in on the value of the land they work, and thus bring them up to the status of their urban equivalents. It was also hoped that this would unleash a flood of new investment in rural areas, modernising agriculture, and unleashing a further round of rapid growth, It is also seen as a key way to unleash pent up spending from rural areas which would become a major area of growth in consumer spending. This is exactly what happened from about 2018 onwards; and

setting up an independent judiciary at local, regional, and national levels

While at the same time as bringing these economic reforms into being, Xi signalled there would be no political liberalisation following the Plenum in 2013. In fact he considerably strengthened the state security apparatus, doubling its budget between 2013 and 2020. Real political reform would not come until Xi successor came to power in 2023. Over Xi’s time in office, political reforms did take place mostly in the countryside, starting with the election of party officials on local councils. To stand you had to be a member of the communist party, but there were real secret ballot elections as early as 2015 in a number of rural areas. This soon spread to provincial governments by 2020, and the party then formalised its already existing factions of conservative, moderates, modernisers and liberals. If a citizen wanted to vote or stand, you had to be a member of the party. This meant that by the time the President and polit-bureau was elected by all party members in 2028, the party itself had grown from 40m members in 2013 to 750m members. 85% of these members voted in the 2028 elections.

China had always thouight of itself as a great power, it is just that western countries had not allowed it to take what regarded as its rightful place in world affairs. Since 2015, when it became the biggest economy in the world, it began to re-assert itself in the manner of a great power: by 2018, it had 4 million men under arms, 30 nuclear powered submarines and 5 nuclear powered aircraft carriers, and over 5000 supersonic strike fighters which many in the west regard as superior to the US F35 Joint Strike Fighter. It also had a global network of weapon carrying drones controlled out of Hong Kong, and a formidable international spy network. As a great-power, it had considerable reach, but saw its primacy as being in the AsiaPacific region. The Americans also thought of themselves as an AsiaPacific power, particularly since Barrack Obama refocused them away from Europe and onto Asia in about 2010. Since then, the Pacific became the primary battleground. Interestingly though, it was not the Pacific but the Indian Ocean where tensions initially first came to boiling point between the world’s two superpowers.

Being the largest trading nation in the world, China in 2015 had built its navy into a significant blue water force, although it was still some way behind the US and even India, whose navy was by far its most significant military force. China was determined to make sure all its sea-lanes were kept open, and that trade could flow in and out of China without interference. In 2015, the most significant of these was not in the Pacific, but in the Indian Ocean. Or, more specifically, the Arabian Sea. This had been for a century or more, one of the busiest sea highways in the world, and was critical for China in particular as the Persian Gulf was its major source of oil and gas. Since the early 1990’s, there has been a great deal of lawlessness around such states as Somalia, Yemen, and the Sudan, in many ways failed states. Somalia also played host to a network of pirates who specialised in boarding western (and sometimes Chinese) freighters, taking their crews and passengers hostage, and then demanding and getting tens of millions of dollars in ransoms.

By 2015, China had just about enough of this. In spite of a large of navies – British, French, German, Italian, American, Australian, Indian, Scandinavian and Japanese – patrolling the Arabian Sea, these hijackings persisted, and were even becoming more daring. China decided to act. First, in the face of mounting international criticism, they sent several divisions of para-troops into Somalia and effectively destroyed the pirate’s operating bases, and killed many of them. Secondly, they put pressure on world banks to freeze their assets. And thirdly, they captured and banished their leader, Jacda Bashire, to the international court in the Hague to be tried (ironic, since they were not a party to the treaty which set the Court up, and did not recognise it as a legitimate legal entity which could preside over its citizens – the same as the US). This effectively ended the pirate operations, at least for some time.

There still remained a core group of criminals who had a organisational structure, and significant wealth through ransoms. On June 5, 2017, one of China’s increasing number of cruise ships was streaming through the South China Sea 2000 kilometres south of Hong Kong and 1000 km east of Vietnam. I was 5.13am. There was an explosion. All 4232 people on board perished, 96% of them being mainland Chinese.

With the re-election of Barack Obama for a second term, it is worth reviewing where the US is at as a society and why Obama needs to take some radical surgery to the country’s body politic to make significant progress.

First though, I should say, that if we had to have a global superpower, the US is about as benign as they come. It has been the global policeman for 75 years now, and has presided over a period of unprecedented global growth, prosperity, and largely without war (at least world war). Sadly though I fear this is all about to come to an end. With the rise of China, the US has significant foreign policy and military challenges, which will be difficult to address, especially with the current state of the US economy and what looks like a permanent realignment of relative might of the two super-powers.

Interestingly, there was recently conducted a study by Stanford University about the attitudes of senior American military officers past and present. Surprisingly, for a group you would normally expect to be strongly pro Republican, and pro military spending, nearly eighty percent of them came out strongly for deeply cutting defence expenditures and spending the money on rebuilding America, especially educational institutions, healthcare, infrastructure, and investing in innovation. What drove such a surprising result? Well one thing the US military is, it is not stupid. These officers fully realised, and articulated very forcibly, their long term future depends on a strong economy. Without economic strength, military might disappears viz; the Roman Empire; the British Empire; the Soviet Empire; the Ottoman Empire. These capable individuals realise this very much, and seemingly are willing to articulate the case for change

So far, Obama has been playing a “hands off” approach to foreign policy and when he has intervened to has been remotely i.e. using surrogate armies and/or heavy use of drone aircraft which allows US pilots to fight a war from the safety of their own US located Airbase. With China, both sides have been treaded warily as they size each other up in Asia, and Asia skirmishes have largely been between China and US allies, particularly over the islands in the South China Sea. There will come a time though when the US will be forced to act in Asia e.g. North Korea, Pakistan, Iran. That will be Obama’s real test.

On the economic front, there is progress being made, much of it coming from market forces rather than government policies. The most significant of these is the historic comeback of the US as a global energy power, mostly off the back of technology change which has allowed access to huge oil and gas deposits from shale which previously was not possible. This means the US will be a larger producer of petroleum products than Saudi Arabia by 2020. Coupled with this, there are domestic regulations in the US which says that domestic gas demand has to be satisfied before exports can be made, and given the US’s highly developed domestic pipeline system, this means the whole of the US can be supplied from anywhere in the country. With gas now flooding the domestic market from shale, at 20% of the market price in Asia, this has given a huge boost to energy dependent industries which have all of a sudden become internationally competitive again. The lower US dollar has also helped in this. This has caused an improvement in employment rates, and with it, a pick-up in housing prices. It may be that 2013/14 will see America climb out of its self imposed trough US will become a significant exporter of gas in the next five years, no doubt causing a downward pressure on world prices, and therefore becoming a significant stimulant for the world economy.

This though will do little to solve the serious social inequity in the US which is significantly disenfranchising more than 50% of the population. For instance, less than 50% of the population pay income tax. This is not because they are cheating, it is because 50% of the population represents 3% of the national income and so simply do not earn enough money to pay income tax. This means the country as a whole is wasting large chunks of its manpower and brain power simply through lack of opportunity and a third rate education system. Coupled with health system which costs twice as much per capita than any other major OECD country, but gets fourth rate outcomes, this same 50% are poorly supported from a health perspective and from a social income perspective.

In his first term, Obama made some significant progress on these issues against fierce opposition from the Republican congress, notably in Health care, but the US is still significantly behind other equivalent OECD countries. In my view, nothing exemplifies the parlous state of American politics and economics as much as the US health system. The US currently ranks about 15th in the table of health indicators in the OECD, yet nothing gets the Republican Party so worked up than when “Obama care” comes up. Even with the progress being made, there are still significant parts of the US population without adequate health-cover, and treatment will remain significantly more expensive than in equivalent countries until Obama takes on the doctors, and introduces a national health insurance scheme with all the economies of scale that represents.
One thing we can say though is that one of the most consistent things about America throughout its history is its ability to re-invent itself when all seems lost: slavery; the Civil War; the Great Depression; Pearl Harbour; the Cold War; Russians putting the first man into space; Vietnam. Unfortunately, now almost every statistic, financial and no- financial, shows the US in decline. And its political system is so badly broken, in spite of Barrack Obama’s best efforts. There has seemed simply an inability to do anything about it, particularly leading up to the last Presidential election. One of the outcomes of that election though is the naval-gazing that has caused in the GOP, and the willingness of least some in that party to consider modernising themselves. This has not yet seen any change in their politicians in Congress and compromise from their side still seems out of the question.
Let’s take a look at these key social indicators:

1. US Social Indicators are going in the wrong direction.
The Table below from the OECD shows just how badly the US is doing as a society. Nearly all its social indicators are in the bottom half of the OECD league tables. What the table below shows is the distribution of social indicators across all OECD countries, and breaks them up into countries in the top two deciles, in the bottom two deciles, and in- between. The measures include:
a. Household income (PPP)
b. Ratio of employment to population 15-64
c. Unemployment rate population 15-64
d. Reading literacy scales
e. Poverty rates
f. Percentage finding it difficult or very difficult to manage on current income
g. Percentage of average gross wage to meet poverty threshold
h. Life3 expectancy at birth
i. Infant mortality rate
j. Rate of positive experience
k. Percentage of persons satisfied with water quality
l. Percentage of people expressing a high level of trust in others
m. Corruption index
n. Pro-social behaviour
o. Voting rates
p. Tolerance of Diversity

Net Score of top decile minus bottom decile scores by OECD countries

Countries

Top Tweo Deciles

Bottom Two Deciles

Net Score

Net Ranking

Australia

8

0

8

3

Austria

4

0

4

10

Belgium

1

0

1

17

Canada

4

1

3

12

Chile

2

8

-6

27

Czech Republic

2

6

-4

24

Denmark

10

0

10

1

Estonia

0

9

-9

32

Finland

7

0

7

5

France

1

0

1

17

Germany

2

0

2

15

Greece

0

5

-5

25

Hungry

1

9

-8

30

Iceland

9

0

9

2

Ireland

5

1

4

10

Israel

0

9

-9

31

Italy

1

3

-2

21

Japan

5

2

3

12

Korea

2

5

-3

22

Luxenberg

5

2

3

12

Mexico

1

11

-10

33

Netherlands

8

0

8

3

New Zealand

6

0

6

9

Norway

7

0

7

5

Poland

0

7

-7

29

Portugal

0

5

-5

25

Slovak Republic

2

8

-6

27

Slovania

2

1

1

17

Spain

2

2

0

20

Sweden

7

0

7

5

Switzerland

8

1

7

5

Turkey

1

14

-13

34

United Kingdom

3

1

2

15

United States

2

5

-3

22

Source: Compilation from OECD Social Indicators in Society at a Glance 2011

There are many highlights in this information, but the most worrying from the US’s perspective is that it comes 22 out of 34, behind such advanced economies as Italy, Spain, Slovenia and equal with Korea. To be fair, it is likely that many of the European countries have gone backwards since the GFC and the Euro crisis(s), but so will have the US. It is likely that countries such as Korea and Israel will have gone ahead of the US since then given neither was greatly affected by either the GFC or the Euro crisis. This probably puts the US about 25th, a disgrace given it is the wealthiest country on earth, and is the most advanced technologically, militarily, and academically.2. US Obsession with Religion:
If you look at the measures outlined above, many of the social indicators where the US scores badly is what could broadly be called “social tolerance”. Much of this stems from the blind adherence to religious doctrines for much of the population, and much of its politics. The US is about the only country in advanced economies where it would be impossible for a non-believer to be elected to public office. Over 80% of the population goes to church on Sundays, where in the rest of the anglo world it is less than 10%. Even in the so called Catholic countries of Europe, such as Italy and Ireland, church attendances are less than 20%.
As a direct result of this social intolerance in the US, social measures are well below advanced countries norms. Take teenage pregnancies. With the exception of Russia (practices there are distorted by the championing of abortion as the preferred form of birth control under communism, and these practices continue today), the US has the worst record of teenage pregnancies in the OECD.

Why? Primarily the opposition of the religious right, and the Catholic Church to both birth control and comprehensive sex education in schools (see table below);Birth, Abortion and Pregnancy Rates for Developed Countries Ages 15-19 (per 1,000 population)

Related to this, is the increasing trend in the US of children not been vaccinated for preventable diseases, mostly because of opposition from the religious right, who regard it as “ungodly”. The result, eminently preventable diseases such as hooping cough, measles and polio are on the rise there, when even in the developing world, partly as a result of the great work by that great American Bill Gates, and his Gates Foundation, rates are rapidly decreasing. In most of the developed world, these diseases are virtually eliminated by almost universal inoculations of the young.3. The Paralysis of the American political system.
The US is not a Westminster style parliamentary democracy. Although difficult to believe in the current state of play, the US is not an adversarial system in the sense that Westminster democracies like Australia, the UK and Canada are. The way the US system has worked for 400 years is through compromise and consensus, with much of the power residing with the President. It depends on the legislature reaching compromises in order that the business of government gets done. Now, however, one side, The Republicans, have allowed their party to be high-jacked by extremists (the Tea Partyists), and not very bright ones at that, who regard compromise as a sin (a word used advisedly). Much of their ideology comes from the extreme right parties of Europe (Le Pen in France, the National Front in Britain, the successors to the Nazis in Germany, and One Nation in Australia). These parties generally are made up of disaffected working class voters, often extremely racist, and often under-educated. They carry with them an under-lying hatred of the way things are, and a frustration that they feel they are not getting their “fair share”. Usually, when prosperity continues these people remain in a small minority, but after the economic dislocation in Europe and the US in the last 5 years it has created an environment for extreme views to flourish, in much the same way that the consequences of the Treaty of Versailles and the Great Depression was directly responsible for the rise of Hitler and the Nazis. This time, however, the greatest victim is the US itself, where they have managed to successfully press the self destruct button. This will only be addressed by the moderates in the Republican Party recognising the need to modernise, and being able to convince the social conservatives led by the Tea Party. It is in the early stages of this playing out, but the GOP will rapidly become irrelevant without reform, and will probably lead to the emergence of a new party or permanently entrench the Democrats in the White House.
For the current state of play to continue, the US has almost become ungovernable. No matter how competent the individual is in the White House, and how much his/her heart is in the right place, there seems to be no way by which will emerge a means to bring in the desperately needed reforms which will reverse the poor social outcomes listed above, and restore the United States reputation, previously assumed by the rest of the world, as being the beacon for progressive thinking, social innovation, and sound economic management. The next three years will be critical to this, and Obama will either emerge in his second term as a reformist president in the Roosevelt or Johnston mould, or to be cast out as the biggest lost opportunity in US history.

An interesting additional dimension to my entry earlier in the week on North Korea appeared in “The Age” this morning (Saturday 9/3/2013) It states:

Missile Shield Spurs China’s Korea Stance

BY JOHN GARNAUT CHINA CORRESPONDENT BEIJING

CHINA’S support for tougher sanctions against North Korea has been prompted in part by concerns of an evolving USanchored missile defence system on its borders, say Chinese and Western analysts. The missile defence systems involve new land and sea-based radar systems, missile interceptors and intelligence sharing between the US and its regional allies aimed at shooting downa North Korean missile during the relatively lowvelocity launch phase. Analysts note that these systems could also be used to shoot down missiles launched from China’s eastern regions.

Australia is building three air warfare destroyers with Aegis radar and missile control systems that can be potentially integrated into the US system. ‘‘ North Korea’s test of a nuclear warhead and missile may not bring much of a [direct] threat to China,’’ said Cai Jian, a North Korea expert at Shanghai’s Fudan University. ‘‘ But the response from Japan or South Korea, or America’s strategic advances into the region, are more disadvantageous to China. These are the reasons China opposes North Korea’s tests.’’

The sanctions against last month’s nuclear test by North Korea were jointly drafted by China and the US and endorsed by the UN Security Council on Thursday night. They will make it more difficult for Pyongyang to shift money and technology in aid of its nuclear program.‘‘ These sanctions will bite and bite hard,’’ said Susan Rice, the US ambassador to the UN. The UN resolution follows Pyongyang’s successful ballistic missile test in December, as well as a stream of bellicose invective. Prior to the agreement, Pyongyang threatened to turn South Korea into ‘‘ a sea of flames’’ .

Responding to the resolution, Kim Jong-un’s regime said on Friday it was nullifying all agreements of non-aggression and denuclearisation with South Korea and was cutting off the North-South hotline. Officials in Seoul said they were on the alert for any possible attack as Pyongyang seeks to vent its anger. ‘ The higher decibel of invective isa bit worrisome,’’ said Bill Richardson, the former governor of New Mexico, who has travelled to North Korea eight times, most recently in January. ‘‘ It’s the highest negative level I’ve ever seen, and it probably means that the hardline elements, particularly the military and not the Foreign Ministry, are in control.’’ On the other hand, Mr Richardson said, ‘‘ China is part of asignificant sanctions effort, and this may cool the North Koreans down, may temper their response.’’

Several analysts said the effectiveness of the sanctions would depend on China adopting a far greater level of enforcement than it had previously. Regional missile defence systems are evolving in response to North Korea’s weapons program and also to increasing concerns about China’s military intentions. ‘ It allows Japan to say, ‘We’re buildinga missile defence system against North Korea but we can also use it to defend ourselves against China,’’’ said Scott Harold, a security expert with the Rand Corporation in Hong Kong. Dr Harold said the US had been strongly encouraging South Korea and Japan to engage in defence cooperation . ‘‘ Beijing is worried that this is a prelude toa trilateral alliance or a Pacific version of NATO.’’

Those defence systems may, in turn, prompt China to build more missiles ‘ The overall direction in which missile defence is going means the US, Japan, probably South Korea and Australia, get used to and work on the basis of integrating their systems ,’’ said Stephan Fruehling, an expert on missile defence systems at the Australian National University’s Strategic and Defence Studies Centre.

‘ This has political implications and symbolism, and that is what is causing China grief,’’ he said.

Sam Roggeveen, editor of the Lowy Institute’s The Interpreter website, said there was a risk of a regional ballistic missile defence race: ‘‘ The easiest way to defeat ballistic missile defences is to overwhelm them with numbers.’’ Chinese analysts say Beijing’s backing of the new round of UN sanctions reflects frustration with North Korea but not a shift in its underlying strategic calculus. ‘‘ People are fed up with North Korea, but I’m not sure this signifies a new age,’’ said Jia Qingguo, professor of international relations at Peking University. ‘ China’s policies are in atransitional period, China is in a transitional period, andI think this period might be quite long.’’

In other words, there is nothing like self interest to spur action. It seems China thinks that the possession of ballistic missiles by North Korea is spurring on the western allies in the Pacific: South Korea, Japan, US. Australia, to do something about protecting their population by building additional alliances and technologies which will negate the affects of the North Korean missile capabilities. This in turn would also negate the effectiveness of China own arsenal.

This is the last thing China wants. Up until now there has been a willingness on both sides – particularly the US and China to try and work through their differences in order to come to a peaceful accomodation in the Pacific. The growth of a new military alliance, facilitated by North Korean intransigence, just might make the Chinese come to the same accord I described in my article earlier in the week i.e. a historical agreement to dismantle the North Korean regime in return for with drawal of US troops from South Korea, declare the Korean peninsula politically neutral enforced by UN troops (not including the US), and hold free and fair elections.

The alternative to this will not only be the development of a military alliance of democracies in the Asia Pacific, but the other action mooted in my earlier articel i.e. the withdrawal of the nuclear guarantee to Japan and South Korea meaning they will acquire nuclear weapons aimed straight at China.

These moves might be just what the new Chinese Premier will need to build a case with the PLA, and the remaining hardliners in his cabinet, to move on North Korea.

It would be both historical and highly statesman-like, and may be the dawn of a new Chinese democracy and peace in what is now becoming an unstable part of the world.

It also happens to be the world engine room for growth in the forseeable future. The stakes are high to get it right…

My view is I think it is time the world community came to an historic agreement and closed down this rogue state before they blow us all up. Isn’t it time that China and the US came to a statesman-like agreement about those crazies. Surely they could do a deal whereby in return for US troops withdrawing from the Korean peninsula and being replaced by UN force including Chinese, they could hold fee elections and unite the peninsula. China doesn’t want a nuclear Nth Korea any more than the US does.

In many ways, the first article by Doug Bandow is sort of agreeing with this view, although he took it further by suggesting the US abandons the nuclear guarantees with Japan and South Korea, which may force China in to coming to a wider settlement including a militarily neutral united Korea. It is an interesting thought. It might also bring Russia into play and force it to play a more constructive role than it has hitherto, both in Asia and the Middle East. A US withdrawal from Korea and the removal of the guarantee certainly is high stakes, but may ironically be less risky than the current stale-mate, where the North Koreans seem to think they can thumb their noses at the great powers with impunity. This is a very serious and dangerous position for both great powers to take. Any little tin pot regime who acquires nuclear weapons in the future will think they suddenly will have equal status, and who knows what might happen. It also gives every tinpot dictator every reason to go after the nuclear option because they then will be propped up (unintentionally) by the great powers.

I think in terms of geo-politics the Korean situation is a bigger issue for both great powers than a middle east settlement but there appears to be zero momentum for it. Withdrawal of the nuclear guarantee may be seen as the ultimate in “real politic” but if it ultimately brings to a head the issues that are bubbling along now and leads to a settlement, it could be Obama’s and the new Chinese regime’s greatest foreign policy achievement. It certainly should be worth considering, and undoubtedly ups the stakes considerably.

Not sure about the view on China’s intentions. I hear what he says about mineral rare earth, but the benefits sort of pale into insignificance when compared to the risk of regional wars with the withdrawal of the US. Personally, I would have thought a democratic, neutral, economically progressive united Korea would be far more beneficial to China than an unstable nuclear armed failed state.

The other point I’d make, is that any unification should be thought about in the light of the German experience. They would be crazy to converge onto a common currency as Germany did to its great cost. Better to have a federation with two currencies, and watch south Korean, Japanese, US and Chinese investment money pour into the North until in 50 years time when the north and south economies are similarly prosperous then they could unite the currencies.

The North is brilliantly positioned to become the new north Asian economic super tiger.Now that would really be to China’s advantage.

Further to my piece yesterday, where I suggested the debate around the implementation of the Asia in the 21st Century Report, there is a discussion this morning in the Fairfax Press in “the zone” where Ernst & Young outline the finding of their research into the education sector.

Clearly the revolution is coming, but so are amazing opportunities. Implementing across the country Asia language skills is surely doable over the next 20 years off the back of thesE changes.

A very interesting comment buried in the narrative is “that both political parties have beenengaged and thoroughly understand what is coming in Education” what does this mean? It means that this criticism of the Asia White Paper by the Opposition is yet another one of Abbott’s scare campaigns. You would have though there would be a rethink by now in the Coalitionthat they need to switch the debate to one based on policy difference rather than their knee jerk negative reaction.

Written by ex diplomat, senior public servant, and political insider Bruce Haigh, it gives an insiders view of Abbott dating back to his undergraduate days right through to his present persona. It explains more clearly than I have seen elsewhere why Abbott behaves as he does, and why he is incapable of modifying his current self destructive ways.

It also spells out very specifically why we must all work (on both sides of politics) to ensure Abbott never becomes Prime Minister.

The changes in the world order we have seen in the last 5 to 10 years are not only extremely profound, they are also permanent, however much that is possible. The power of the world is rapidly shifting eastwards, returning it to where it was before and during the middle ages and before the industrial revolution. The power the European states, and after that, the Americas, acquired on the back of rapid industrialisation , was in many ways a historical accident.

Interesting academic research recently undertaken in the US looked at historical patterns of economic measures: trade flows, per capita income, population levels, capital flows, government expenditures, GDP per head – everything basically which makes the world economy function. And what were their conclusions? In 1970, the centre of the world economy was in the mid Atlantic; in year 2000, the centre had shifted to Israel; by 2020, it will shift to Tibet – the inevitable force eastwards.

The shift of power to Asia, and more particularly to India and China, returns the world to the natural order of things, driven inextricably by large populations, strong cultures, and strong commitment to education and development. Industrialization is being pushed along by a final realisation that this can only occur under free markets and open trade, and once started, and once the benefits are felt by the populations, the electorates will not allow a return to the “bad old days”.

In this, it is interesting to observe the handover of power currently underway in China. Early indications are that the progressive faction of the communist party lead by Wen Jiabao has won the ideological battle between the old ultra conservative Mao sympathisers, lead by the charismatic but ideological Bo Xilai, and those who want to uphold the rule of law and move gradually to some level of democratization. A similar struggle is currently being played out in India, although possibly with a different outcome. The pace of reform there has slowed over the past three or four years, and there is not a clear indication of the political outcome. However, India being a democracy, a slow down in economic growth and development will inevitably cause an electoral backlash, which will eventually lead to further reforms. It is just in India everything seems to take so much longer.

Where does this leave Australia? As the only advanced Western economy (including NZ of course) at the centre of the world action. Even our current set of mediocre politicians couldn’t stuff that up. Could they?????

To szegneg…. The Marshall Plan in Europe post WW2 was one of the most visionary policies of the twentieth century. Not only did it buy permanent peace in Europe but provided the platform for unprecedented prosperity which along with the US economy has been driving growth now for 60 years.

Who has been the beneficiary of this? Undoubtably the US. The US has been paid back many many times by the Marshall Plan through this prosperity – there is no justification at all for them to demand payment from Europe (or Japan for that matter).

It is true Japan is probably in the best position to finance its own reconstruction due to its very high level of foreign reserves and individual household savings rates. If they are able to unlock household savings, it will produce over the next ten years, a third engine room for world growth along with China and India. Whilst this will put further pressure on scarce resources, and no doubt drive up world commodity prices further, overall it will push the world into another decade of substantial growth and prosperity.